1. On 1st October, 1944, Lady Ratanbai Mathuradas Vissanji of Bombay created a trust of 235 ordinary shares of Vishnu Cotton Mills of the face value of Rs. 100 each (to which was later added ascertain deposit amount) in favour of her son, Pratapsinh, his wife, Pushpabai, and children. By this document she had first of all created an interest in the income in favour of Pratapsinh, her son, and after his lifetime in favour of Pushpabai, her daughter-in-law, and after the lifetime of the survivor of the two in favour of their four children upon certain terms, to which we shall presently refer. After the trust was in operation for nearly eleven years, the beneficiaries, Pratapsinh and his wife, Pushpabai, executed a deed of release on 3rd April, 1955, whereby they completely relinquished their right, title, and interest under the deed of trust dated 1st October, 1944. They merely declared that they 'do and each of them both hereby relinquish, release, surrender the right, title, and interest, in the income hereafter to arise from the said trust property and to which they are entitled by virtue of the said deed of settlement dated the 1st day of October, 1944.....' Nothing further was said with the result that the other terms of the deed of trust dated 1st October, 1944, continued to operate and as a result of the relinquishment of their interest by Pratapsinh and his wife, the interest created in favour of the grandchildren as remainder men was accelerated.
2. Now the terms of the trust deed relevant for the purposes of deciding the controversy in this reference are as follows : We state them serially and have numbered them for convenience of further reference though in the document they have not been numbered. After declaring the trusts, the settlor made provision for payment of all the usual expenses of management of the trust property, costs, charges and expenses of and incidental to the preservation of the trust property, costs, charges and expenses of and incidental to the preservation of the trust property. Then the directions as regards the corpus and the net income from the trust were as follows : '(1) To pay the net income to the said Pratapsinh for his absolute use and benefit during has lifetime; (2) from and after his death, to pay the net income thereof to Pushpabai, wife of the said Pratapsinh for her absolute use and benefit during her lifetime; (3) from and after the death of the survivor of the said Pratapsinh and the said Pushpabai, the trustees shall hold the trust property in the manner hereinafter mentioned; (4) they may in the meantime at their absolute discretion, accumulate the whole of the net income of the trust property or such portion thereof as they may think proper and or apply the whole income or such portion thereof as they may in their discretion think proper for the maintenance, education and benefit of such one or more to the exclusion of other or others of the following persons, viz., the male and female children and issues of the said Pratapsinh by any wife of the said Pratapsinh in such proportion and in such manner in all respects as the trustees may in their discretion think proper; (5) upon the youngest living child of the said Pratapsinh attaining the age of 18 years, the trustees hall hold the then corpus of the trust property upon trust and divide and distribute the same among all the children (male and female) of the said Pratapsinh in such proportions and shares that each son of the said Pratapsinh shall get double the share of each daughter of the said Pratapsinh and each daughter of the said Pratapsinh shall get half the share of each son of the said Pratapsinh and if there is only one child of the said Pratapsinh, then hand over and deliver the same to him or her alone; (6) provided that if any child either male or female of the said Pratapsinh has died before the period of distribution leaving children or child male and/or female, the trustees shall in making the aforesaid shares calculate one share of each predeceased child of the said Pratapsinh which he or she would have taken in the above proportion had he or she been living at the period of distribution and divide and distribute such share of each predeceased child of the said Pratapsinh among his or her children or child living at the period of distribution if more than one, then in such proportion that each male child gets double of what each female child gets and if there is only one child, to deliver and hand over the same to him or her alone.' (7) Finally, there was a residuary clause, that if there be no person contemplated in the trust deed alive or no person in existence or capable of taking the corpus of the trust property, then the trustees were given the discretion to apply the corpus for certain stated charitable purposes, with which we are not here concerned.
3. As we have said, after about eleven years that the trust was in operation, the first two beneficiaries, Pratapsinh and his wife, Pushpabai, relinquished all interest under the trust deed by the deed of release executed on 3rd April, 1955. It is not in dispute that, as a result of the relinquishment, two provisions of the trust deed, viz., Nos. 1 and 2 above, ceased to operate and the case must be judged as if the said Pratapsinh and his wife were no longer alive. It is also not in dispute that upon these facts section 41 would apply. The main question is whether the income arising from this trust should, after the coming into operation of the provision marked (3) above, be taxed 'in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable' within the meaning of those words in section 41 of the Income-tax Act, or whether the proviso to section 41 would apply in the present case, because the individual shares of the persons on whose behalf the income, profits or gains are receivable are 'indeterminate or unknown'.
4. The relevant portions of the section and the proviso in so far as they are applicable to the present case are as follows :
'In the case of income, profits or gains chargeable under this Act which ... any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise... are entitled to receive on behalf of any person, the tax shall believed upon and recoverable from such...... trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly.
Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate......'
5. Now we are concerned with the assessment year 1958-59 corresponding to the previous year ending March 31, 1958, which is about three years after the deed of release was executed. For the years 1956-57 and 1957-58, the Income-tax Officer had made the assessment on the trustees as an association of persons, did not levy the tax on the association but taxed the shares of each beneficiary, in his or her hand separately. However, for the 1958-59 assessment year now under reference, he changed the basis of the assessment and assessed the income in the hands of the trustees and levied tax thereon at the maximum rate, because he held that the individual shares of the beneficiaries were 'indeterminate and unknown'. The reason why he did so may be stated in his own words as follows :
'The beneficiaries from May 1, 1955, are, therefore, the four children. It is seen above that, until the last child attains the age of 18 years, the income for the maintenance, education and benefit of one or more of the children to the exclusion of others. The shares of the beneficiaries, viz., the four children of Mr. Pratapsinh, cannot, therefore, be said to be determinate within the meaning of the first proviso to section 41 (1). As the beneficiaries have other income besides their beneficial interest in the trust, the income from the trust has to be assessed at the maximum rate.'
6. In appeal from this order, the Appellate Assistant Commissioner reversed the decision. He observed :
I do not think that the Income-tax Officer was right in taking this view. The moment the relinquishment deed was executed, the children stepped in with definite shares but the division of the corpus had to be postponed according to the terms of the trust deed until the last child attains majority. No doubt the trustees were given a discretion which is not mandatory for utilising the income of the trust for the education etc., of the children until the last child attains the age of majority. The trustees did not, however, utilise that discretion and did not spend any part of the income in any of the years since the relinquishment deed for the maintenance, education, etc., of the children.'
7. As stated above, the trustees were dividing the income between the four children and crediting the share of each to his/her account in the trust books from the time the relinquishment deed was executed.
8. He, therefore, held that the income was specifically received on behalf of the beneficiaries whose shares were determinate and known. In a further appeal by the department the Tribunal has upheld this view. We shall presently advert to the reasoning of the Tribunal.
9. Now upon this controversy the Tribunal farmed two questions as follows, on a reference being asked for by the Commissioner.
'1. Whether, on a proper construction of the Trust Deed dated October 1, 1944 (annexure 'A') the deed of release dated April 30, 1955 (annexure 'B') the trust income was receivable on behalf of the four children of Pratapsinh before the last of them attained majority
2. If the answer to the above question is in the affirmative, whether the shares of the four children are determinate and known for the purposes of the application of the first proviso to section 41 ?'
10. We have already indicated what was the true nature of the controversy that arose between the department and the assessees. The sole question that arose for determination was whether, consequent upon the execution of the release deed, the proviso to section 41 applied because the shared of the four release deed, the proviso to section 41 applied because the shares of the four children were indeterminate and unknown or whether the income was liable to be taxed as if it were the separate income of each child because their shares were determinate and known. The only contention on behalf of the assessees was that the shares were not indeterminate unknown within the meaning of the proviso and, therefore, they could not be taxed at the maximum rate. In that view, we do not think that the first question referred by the Tribunal really arises in the present case. The whole controversy is, in our opinion, rightly brought out by the second question for decision would properly be whether the children's shares are indeterminate and unknown and not whether they are determinate and known. We would, therefore, reframe the question to be decided as follows :
'Whether the shares of the four children are indeterminate and unknown for the purposes of the application of the first proviso to section 41 ?'
11. Now, after the execution of the deed of release, Pratapsinh and his wife, Pushpabai, having gone out of the picture, the third clause mentioned above would come into operation and the third clause would continue to operate until a specific period of time therein specified namely, 'till the period of distribution of the corpus of the trust property.' What 'that period of the distribution of the corpus of the trust property is, is indicated by the fifth clause above, viz., 'upon the youngest living child of the said Pratapsinh attaining the age of 18 years'. Thus, the document itself contemplates four clear stages during which the trust was to operate upon different terms. The first was during the lifetime of Pratapsinh, the second, during the lifetime of Pushpabai, the third, after the lifetime of both of them, but until the period of distribution arrives, that is to say, until the youngest living child of Pratapsinh attains the age of 18 years. The fourth stage is the one contemplated in clause 5 above when, after the youngest living child of Pratapsinh attains majority, the corpus of the property itself has to be distributed and the respective shares of the children handed over or delivered to them.
12. We are in the present case concerned with the third stage, i.e., the one between the going out of Pratapsinh and his wife and until the period of distribution arrives. Now during that period the provisions of the fourth clause quoted above give absolute discretion to the trustees to do what they like with the income of the trust, but within the purposes and objects mentioned in the trust deed. The power given is that they 'may in the meantime at their absolute discretion accumulate the whole of the net income of the trust property or such portion thereof as they may think proper and/or apply the whole income or such portion thereof as they may in their discretion think proper for the maintenance, education and benefit of such one or more to the exclusion of other or others of the following persons, viz., the male and female children and issue of the said Pratapsinh.....' It will be noticed that, though the trustees are bound to apply the income for the object stated, namely, the maintenance, education and benefit of the persons named, within that purpose, their discretion was absolute and unfettered. They could, for that matter, use the whole of the income for the benefit of only the male child or only one of the female children or any one or more of them in their absolute discretion. If this be the operative provisions, as we think it is, it is clear that the shares of the children or of any of the persons named in that clause would undoubtedly be indeterminate and unknown during] the period during which this provision was operative. WE expressly say this because it seems to us that different consideration may prevail after the period of distribution arrives, but we need not in the present reference concern ourselves with that question. So far as the period between the going out of Pratapsinh and his wife and the period of distribution is concerned, upon the terms of the fourth clause quoted above, we have no doubt that the shared would be in determinate and unknown.
13. But then it has been urged that it has been that it has been found as a fact that the trustees did not utilise any part of the income after the date of the release deed and instead they have distributed it by dividing it into the self-same shares which are mentioned in the fifth clause quoted above, that is to say, giving the male child of Pratapsinh two shares and each of the three daughters one share each and they have accomplished this by opening separate accounts in the account books of the trust in their names and crediting their separate accounts with their respective shares as mentioned in the fifth clause quoted above. These are the facts found and it was urged that in the light of these facts the trustees have exercised the discretion in terms of the trust deed itself and, therefore, by operation of the trust deed itself the shares have become determinate and known and the proviso to section 41, therefore, cannot apply.
14. We are concerned in the present case with an assessment to income-tax and not to wealth-tax. We are, therefore, concerned with the assessment of income and not the assessment of the corpus of the trust property. Secondly, it has to be noticed that the words of the proviso to section 41 are 'where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown'. The word 'receivable' indicates that we have to see whether upon the provisions of the trust deed, such as they are, the shares are indeterminate or unknown or otherwise and from this point of view it seems to us that the action which the trustees may have taken in notionally separating the shares would be wholly irrelevant. We must look to what is provided by the deed and not to what the trustees may choose to do in the implementation of its terms.
15. Moreover, we are not sure whether the action taken in dividing the income and distributing it among the four children of Pratapsinh giving two shares to the son and one share each to the three daughters would be permissible under the provisions of the trust deed itself at the stage with which we are concerned. The purpose for which the trustees are directed to use the income is 'for the maintenance, education and benefit' of the children. Therefore, the trustees were bound to apply the income coming into their hands for the said purposes themselves. We do not think that the purposes mentioned in the trust deed or any of its provisions would justify the trustees handing over the cash to one or more of the beneficiaries, even assuming that the income was for their benefit. Secondly, it seems to us that, by crediting the amount in an account to the particular beneficiary the provisions of the trust deed have not been actually implemented. One at least, if not more, of the children of Pratapsingh is a minor today and the very purpose of the trust was that, until he was a minor, the income should be handled only by the trustees. They could not, therefore, during the period of minority, credit the share of that child in a separate account of that child.
16. Lastly, it seems to us that there] is nothing to prevent the trustees from reversing the book entries that they have made and, in that event, surely the share given to the particular child would again become indeterminate. We do not think that the provisions of the proviso to section 41 can be so interpreted as to imply that we have to see what is the manner in which the trust deed is implemented, in order to find out whether the shares are determinate or known. On the other hand, it seems to us that what we have to look or, is the provisions of the trust deed which give rise to the trust. So reading it, we are unable to hold that, during the period between the going out of Pratapsinh and his wife, Pushpabai, and the date of distribution, the shares of the children can be said to be determinate or known.
17. Some argument was based upon the provisions of the fifth clause which we have quoted above, which is the clause that operates after the date of distribution. Therein, no doubt, a definition of the shares of each of the children has taken place, in so far as the clause provides that the son shall get twice the share of each daughter. It was undoubtedly urged by Mr. Joshi that even then the shared should be held to be indeterminate, because, one cannot predict how many children may be alive on the date of distribution, but it seems to us that that is not a circumstance that has to be taken into account in deciding whether the shares are indeterminate or unknown. The question would be if the fifth clause does come into operation whether on the date on which the assessment is being made the shared are indeterminate or unknown. If the fifth clause were put in operation, it seems to us that the shares would be determinate or known, but, as we have said, that period has not arrived and we are not called upon to pronounce upon it. We only refer to it in order to meet the contention raised on behalf of the assessee.
18. It was then contended by Mr. Mehta that the earlier portion of the document describes what is 'trust property' and in the preamble 'trust property' is defined to include the accumulated income. Therefore, he urged that whatever was the accumulated income, would also be the corpus of the trust property and since the interest in the corpus of each child is determinate and known upon the provisions of the fifth clause we have quoted above, it must be held that when the trustees distributed the income in the exercise of their discretion and credited a fixed amount according to the fifth clause in the account of each child, it was really the corpus of the trust property that was being distributed. In our opinion, that contention cannot be sustained because the provisions of the fifth clause have not come into operation at all. They will only come into operation when the youngest child of Pratapsinh attains the age of the 18 years and when that period arrives we do not know how many of them may be alive. In any case, reading clause 3 along with clause 5, we do not think that the income in the hands of the trustees which they are expressly directed to accumulate could be treated as part of the corpus.
19. It is precisely the failure to distinguish between the provisions governing the corpus and the provisions governing the income that led the Tribunal into an error of law. In paragraph 4 of their order the Tribunal discussed the applicability of section 19 of the Transfer of Property Act and proceeded to observe that, having regard to that section, the shares of the children were determinate and known. In our opinion, section 19 has no application whatever in the present case, because in the present case we are only concerned with the income of the trust and not with the corpus. Section 19, if at all it can apply, may apply when the corpus has to be distributed, as to which we have already said that the time has not yet arrived.
20. On the question of the applicability of section 41, the Tribunal referred to section 3, sections 55 and 56 of the Indian Trust Act and section 19 of the Transfer of Property Act and came to the conclusion that the share of the Pratapsinh's children was a vested interest in both income and corpus. They observed : 'The children have, therefore, some sort of vested interest both in the accumulated income and the corpus of the property. It is true that the income, whether accumulated or otherwise, could be applied by the trustees in their discretion for the education and maintenance of the children beneficiaries. But all this did not detract from their vested interest in the accumulation. Likewise, the postponement of the distribution of the corpus did not detract from the essential nature of the vested interest simply by the reason of enjoyment having been postponed. This is very clear from the Explanation of section 19 of the Transfer of Property Act quoted supra. In our view, therefore, the main provision of section 41 (1) will apply and not the proviso thereof. The proviso could apply and not the proviso thereof. The proviso could apply only where any such income profits or any part thereof are not specifically receivable on behalf of any one person or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown... We hold that in the present case such persons are not either indeterminate or unknown.' The error of this reasoning lies in this that the Tribunal failed to appreciate that the question whether the interest of the children was vested in them or not has nothing to do with the question whether the interest of the children was vested in them or not has nothing to do with the question whether their shares were indeterminate and unknown. Even though an interest may be vested within the meaning of the Transfer of the Property Act, the share may still be indeterminate and unknown, within the meaning of section 41, the share may still be indeterminate and unknown, within the meaning of section of the Income-tax Act. We think that there was a clear error of law made by the Tribunal in coming to their decision.
21. For the reasons given, we answer the question referred in the affirmative. The assessees will pay the costs of the Commissioner.
22. Question answered in the affirmative.